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Bernie joins host Grace Ormsby to unpack how the economic downturn has been affecting different demographics, why many in the older age bracket are experiencing increased levels of anxiety, and what those people can do to preserve their nest egg and minimise their losses.

Bernie also delves into Industry Super Australia’s stance towards accessing superannuation early as part of the government’s stimulus measures, whether now is a good time for people with the means to contribute extra to their super, and industry fund plans for a road to recovery for both their members and the national economy.

What are the biggest problem areas you see with LRBA documentation?

A limited recourse borrowing arrangement (LRBA) is where a superannuation fund borrows money to buy investments, usually real estate. This type of arrangement is mostly used by SMSFs.

The superannuation laws prohibit a superannuation fund from borrowing money unless exceptions apply. The main exception used by SMSFs to make a geared acquisition of property is contained in s67A of the Superannuation Industry (Supervision) Act 1993 (Cth).

In a nutshell, the requirements of this exception are that the superannuation fund must pay for all of the purchase price for the property but the trustee of the superannuation fund cannot be the legal owner (ie, title to the property will not be registered in the name of the fund trustee). Instead the fund must appoint another company to act as trustee of what is called a bare trust. The trustee of the bare trust is referred to as a bare or holding trustee.

For the duration of the loan, the bare trustee holds the property for the benefit of the superannuation fund (ie, on trust for the superannuation fund) and this arrangement is confirmed in a declaration of trust, which is known as a bare trust deed.

That declaration of trust comes in all shapes and sizes depending on the document provider, and while it is the most crucial document, it is not the only one that should be prepared. It is not uncommon for trustees to forget that minutes of all meetings of the directors or the trustees about matters affecting the trustee(s) must be prepared (and kept for at least 10 years), otherwise a fine may be payable.

There are four main problems that can generally be seen with LRBA documentation.

1. No LRBA documents

Sometimes no documentation supporting the LRBA has been prepared or signed by the parties. Although there is no specific requirement under the superannuation laws or trust law that the trust be expressed in writing, the exception requires the trustee of the superannuation fund to have a right to request that the bare trustee transfers the property to the fund. In the absence of a document stating so, it may be difficult to convince an auditor or the ATO that such a right exists and that all of the requirements of the exception are met. If all the requirements are not met, the superannuation fund will have committed a breach of the borrowing rules.

Also, no LRBA documentation means that an eventual transfer of property from the bare trustee to the trustee of the superannuation fund will be liable for full stamp duty on the value of the property. For example, for a property in NSW valued at $500,000, that’s almost $18,000 (versus nominal duty of $500 which would be payable if the appropriate LRBA documentation had been prepared).

Finally, from a practical viewpoint no bank is going to lend to a superannuation fund unless all the correct documentation is in place.

2. Incomplete LRBA documents

Some bare trust deeds are prepared where the parties have to write down the details of the property before signing and sometimes this step is missed. This is likely to not only complicate the stamp duty assessment of the bare trust deed but may also cause compliance issues if the document does not identify which property is being held on trust for the superannuation fund.

If the declaration of trust does not identify the property, this generally results in the document being assessed differently by the local duties authority than if the property was identified. Stamp duty would still be nominal but the organisational and long-term planning skills of the trustee would be put to the test. In fact, it is important that the trustee retains particular documents (eg, bank statements) until the loan is repaid (which can be 15 to 20 years down the track!) to ensure that an eventual transfer of the property to the superannuation fund is also only liable for nominal stamp duty.

3. Incorrectly drafted LRBA documents

One of the most important rules for this type of arrangement is that the superannuation fund can only acquire one single acquirable asset using one loan and that the asset is held in one bare trust.

If the bare trust deed identifies two or more acquirable assets (e.g. a unit and a carspace/storage unit on separate titles), this means that multiple assets are held under the one trust.

This structure is in breach of the borrowing exception rules and will also potentially give rise to in-house asset issues. A contravention of the borrowing may prove costly as the ATO is likely to impose a penalty of $10,800 per trustee and the superannuation fund will have to incur legal and conveyancing costs in remedying the breach.

4. LRBA documents signed in the wrong order

LRBA documents have to be signed either before or after the contract of sale, depending on the state or territory where the property is located. While this issue is more relevant in terms of stamp duty than compliance, it remains significant because the order in which the documents have been signed will determine the amount of duty that the superannuation fund will pay in this transaction. In the worst-case scenario, the fund may end up paying three lots of full stamp duty: once on the contract of sale, once on the declaration of trust and once on the transfer from the bare trust to the superannuation fund once the loan is repaid.

The stamp duty requirements vary from state to state, so it is crucial that you speak to a legal practitioner before signing any conveyancing documents.

Peter Townsend, principal, Townsends Business & Corporate Lawyers

What are the biggest problem areas you see with LRBA documentation?

Peter Townsend, Townsends Business and Corporate Lawyers

Last Updated: 20 December 2019
Published: 31 March 2016

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